A decade ago Margaret Thatcher declared 'there is no alternative' and
rejected calls for easier economic policies. She is long gone, yet John
Major and chancellor Norman Lamont are now playing the same tune. And that,
says Phil Murphy, is because they can do even less than their predecessor
to revitalise British capitalism
Do they have an alternative?
More and more commentators are arguing that unless the government acts soon,
the British recession will turn into a slump. They are wrong. Britain is
already in a slump. The recession will end at some point and the economy
will stop contracting, but there is no scope for a sustainable recovery.
The British economy is likely to be bumping along at the bottom for some
time to come.
The fact that more experts are talking about a slump is, however, significant.
It reflects the recent mood-change over Britain's economic prospects.
A few months ago, politicians, economists and journalists believed their
own predictions of a recovery. Now very few of them believe anything of
the sort. The Sunday Times, for example, has abandoned its 'green
shoots of economic recovery' column, probably reckoning that a 'brown shrivelled
dead bits' column would better reveal the real state of the economy.
After almost 18 months of recession, it has started to dawn on them that
this is no ordinary cyclical slowdown. Expectations are down, pessimism
is up. The failure of the predicted post-general election recovery to get
beyond anecdotes of the 'there were more people looking around my showroom'
variety has been the last straw for many. Now economists talk of things
not improving much until 1993, and some say not until the second half of
When the heads of the Group of Seven top capitalist nations met in Munich
in July for their annual economic summit it only made perceptions worse.
So low were their expectations that they arrived at this economic summit
willing to talk about anything except the world economy. Our always-on-the-ball
John Major got himself scolded by the rest when he made the mistake of trying
to raise trade policies and the lack of movement in the Gatt talks.
Some of the Western leaders openly asked whether there was any point getting
together for such non-events in the future. After all, getting together
in such high-profile fashion to do nothing only serves to highlight
the seriousness of the crisis. Anybody watching the summit could well conclude
that, if all of the world's leading economies are experiencing slow or nil
growth and yet there are no solutions on offer, what hope is there for the
smaller industrialised countries, never mind the second and third worlds?
In this mood of doom and gloom comparisons with the Depression of the 1930s
are becoming more common. William Rees-Mogg, former editor of the Times
and co-writer of the sombre The Great Reckoning, has drawn parallels
between the Munich economic summit and the impotence of world leaders in
the thirties, and warned the British government of the dangerous social
and political implications of another Depression (Independent, 13
The mood of pessimism about Lamont's fabled recovery is breeding desperate
calls for government action. The 'there is no alternative', 'steady as she
goes', 'be patient', 'do nothing' approach from the Tory frontbench has
been attacked from all sides. Tory back benchers, Labour front benchers,
right-wing monetarists and liberal Keynesians all say something must be
done. But what?
What's a £?
The most popular demand is for the government to stop propping up the pound
within the European Exchange Rate Mechanism (ERM) and so cut interest rates.
Devaluation of the pound (or as they say in polite company, realignment
downwards) is now backed by Neil Kinnock and Baroness Thatcher, leftish
Keynesian economists like Cambridge's Wynne Godley, free market monetarists
like City economist Tim Congdon and Sir Alan Walters, as well as the new
CBI chief, the chairmen of ICI and Tate & Lyle, and the chief executive
of Midland Bank.
The significant thing here is not the diverse range of people backing
devaluation, but how quickly the general mood has changed. Five months ago,
at the time of the election, devaluation was a very dirty word in establishment
circles and its proponents were regarded as little better than traitors.
The sudden about turn is a sign of how desperate they have become about
Up the creek
So why is the government so intransigent in the face of these calls for
action? It is doubtful that the cabinet itself remains confident of
an early recovery. The increasingly tetchy performance of the chancellor
in dismissing his critics as 'ridiculous', 'alarmist' and 'up the creek'
belies the government's own fears. But even if Major were to admit that
he did not believe in the fantasy world he has painted, of Britain and sterling
replacing Germany and the mark as the economic centre of Europe, it would
make little difference. There is nothing he can do to turn things around.
In its defensive reaction to criticism, the government betrays the recognition
that it has little scope to make a difference to the economy. The Tories
are acting out the brilliant discovery which the economics professionals
made in recent years (before their current fit of panic): that government
intervention in the economy can no longer galvanise capitalism. The old
levers of fiscal and monetary policy just do not work any more.
No more kick-starts
Before their fear got the better of them in the past few months, the same
message had been coming through in economic think-tank reports, in bank
and investment house surveys, and in the financial and business press.
Each time, it has been introduced as a new discovery - 'it's now realised
that' or 'contrary to the conventional view' - but the message is the same:
government action cannot have a dynamic economic effect.
Whatever governments do - lower interest rates, raise them, spend more, spend
less - economies just seem to bump along at the bottom unaffected. As Major
accurately said in July of the American experience of 18 cuts in short-term
interest rates, 'it has not produced the kick-start to the economy that
many anticipated'. Faced with the fact that it cannot kick-start the economy,
the British treasury team has tried to make a virtue out of their impotence
by arguing that they're not going to be pushed into deviating from their
long-term strategy of...doing nothing.
Norman Tebbit, in adding his voice to the 'cut interest rates' chorus, dubbed
Lamont the 'no-club' chancellor, in contrast to 'one-club' chancellor Lawson
who relied only on interest rate changes during the late eighties. In replying
on BBC Radio's World this Weekend, Lamont insisted that the government's
was 'the only policy that could be pursued'. What this show of strength
really amounts to is abandoning any pretence of managing the economy, and
just drifting along with events.
Lamont's predictions of a rosy future are too absurd to waste time on. But
the view that there's very little governments can do to positive effect
is well founded. It corresponds to the real decay in the Western economies
which marks this recession out as the start of a full-scale slump, not just
in Britain but worldwide. After 20 years of cyclical crises since the first
major postwar recession of 1973, capitalist economies are becoming more
and more immune to government intervention. They are becoming too far gone
to be revived by the old medicinal methods.
Both the British government and its critics try to blame past policy errors
for the current mess, whether it be making credit too easy in the eighties
or joining the European Exchange Rate Mechanism in 1990. But these are all
just attempts to find scapegoats for a moribund economic system.
The different policies which are now being blamed were only pragmatic responses
to an earlier stage of the crisis. They are not the causes of the present
economic difficulties. But the fact that they have failed to resolve
things is testimony to the growing ineffectiveness of short-term techniques
of crisis management. In so far as previous palliatives have worked at all,
it is only at the expense of creating greater problems today. Yesterday's
'solutions' have become today's symptoms of a slump which is rooted, not
in one or another policy, but in the inherently crisis-ridden character
of the capitalist economy.
Out of control
The key capitalist survival mechanisms of the 1970s and 1980s - state intervention
and credit expansion --are now relatively exhausted. The modern economy
has become dependent on state support, whether administered through government
contracts to the defence industry, pharmaceutical companies and building
contractors, or through backhanders like selling nationalised assets to
the private sector on the cheap and subsidising Canary Wharf. As a result,
the capitalist economy has kept going longer than was justified by
real levels of profitability. This is one reason why government budgets
are now increasingly out of control.
Credit has been the other trick used to keep the wheels of the economy moving.
Through borrowing it has been possible to extend production even when profitability
has been poor. Hence the explosion first of third world debt, and then,
during the 1980s, of government, corporate and personal debt in the West.
These measures of state spending and credit expansion are now widely blamed
for creating debt-management problems. More importantly, however, they no
longer operate as effective economic boosters. Look at how the limitations
of effective state spending have been reached in Britain.
Back in the 1930s, state spending provided an extraordinary bonus to help
stimulate the economy. Before the thirties, government spending was pretty
insignificant, equivalent to about one tenth of the whole economy.
When it doubled during that decade, it represented a substantial injection
of aid for the other 90 per cent of the economy.
Today, by contrast, Britain goes into slump with an economy already largely
based on state activity. Government expenditure represents well over 40
per cent of national output. Changing government spending by a couple of
per cent of national output might make a big difference to the government
borrowing requirement, but has far less positive impact on the smaller productive
base of the economy which remains. British capitalism has become so dependent
on state spending that it has become almost immune to this wonder-drug of
an earlier time.
Worse still, the climate of international economic cooperation which facilitated
the anti-crisis policies of the recent past is also exhausted. Over the
past 20 years, the short-term stimulus provided by state spending and the
international expansion of credit was only made possible by the high level
of international capital flows among cooperating powers. As the Munich
summit revealed, this system of cooperation is becoming far less durable
The tendency towards the breakdown of international economic cooperation
results from the demise of the relatively stable political order of the
Cold War. Economic factors are compounding the new tensions. Cooperation
relied on the relative prosperity of the stronger economies of Japan and
Germany. They provided the funds to help out the others, so stimulating
the world economy and benefiting themselves. Today the synchronised
world recession makes it more difficult for Japan and Germany to play
this locomotive role. They will look to managing their own economies first,
and hold back on making concessions to help others.
Crisis to slump
On the one hand, the stagnation of economic life stimulates economic conflict
and rivalry - look at tensions over interest rate levels, over the world
trade talks, over Japanese investment in the USA. And on the other, this
weakening of the framework of international cooperation makes it more difficult
to limit the scope of the recession. These two interacting processes exacerbate
The greater barriers to crisis management by governments today explain why
this recession has been transformed into a slump. Of course, it is always
possible that the panicky Messrs Major and Lamont will buckle under the
pressure and try to do something, anything, to improve matters. The strength
of their resolve cannot be assumed; but the desperate state of their economy
can. That makes it certain that the government's action or inaction in the
sphere of economic policy will have negligible impact.
Although they can do nothing to pull the economy out of slump, the one sphere
in which government policy could have an impact is the living standards
of the working class. Recent discussions about cutting welfare benefits
and freezing public sector pay indicate the sort of 'positive action' we
can expect to see more of.
Reproduced from Living Marxism issue 47, September 1992